Euro-Trashed? Why You May
Want to Buy That BMW Now

Car Makers Have Held Down Price Increases
As Dollar Falls, But That's Likely to Change

By JONATHAN WELSH
October 2, 2007; Page B11

Drivers who have been thinking about buying a European luxury car may not want to wait too long.

As the dollar continues its long slide against the euro, prices of vehicles made by such auto companies as BMW AG, Porsche AG and Volkswagen AG's Audi unit have steadily crept upward ahead of U.S. and Japanese vehicles over the past few years. But while car makers have largely avoided substantial price increases so far, some analysts are warning that could change as soon as next year.

They "can't make money at the current exchange rates, so they either have to raise prices or start building them here," says David Healy, an analyst at financial-services firm Burnham Securities.


Jaguar's XF sedan will likely cost more than the model it replaces.
Porsche's Carrera could become even more expensive.

The dollar's weakness against the euro makes European products more expensive for consumers using dollars. If the trend continues -- and many analysts expect it will -- European car makers ultimately may have to raise prices on vehicles they build in Europe and sell in the U.S., shift production to the U.S. or other countries with lower costs, or simply live with lower profit margins.

"It's going to start to bite soon," says Nigel Griffiths, who directs European auto market analysis for Global Insight, a research firm in Lexington, Mass.

So far, European car makers have been able to hedge against currency fluctuations by buying contracts that guarantee certain exchange rates. But many of these contracts are set to expire soon, analysts say. Hedging lessens the Europeans' need to quickly change prices with every currency fluctuation, but the strategy is of limited value during long periods of weakness for a particular currency, Mr. Healy says. "They offer mitigation but nothing more," he says.

Increasingly, auto makers are seeking so-called natural hedges by building factories in the U.S., as BMW and Mercedes-Benz parent DaimlerChrysler AG have done, and boosting capacity at existing U.S. plants.

Some companies are combining strategies. BMW has taken a profit hit on cars it builds in Germany and Austria and sells in the U.S., thanks to the weak dollar, but its factory in Spartanburg, S.C., has helped it avoid some of the negative effects. Now the company says it plans to build more models and nearly double production in the U.S. to help insulate itself from currency fluctuations.

Volkswagen says it is also considering building cars here if the dollar remains weak. The company has cut costs by building vehicles in Mexico for years, but says its Mexican plant lacks the capacity to satisfy the entire U.S. market.

James Grichar of Woodstock, Va., had wanted a Porsche Carrera S for years when he finally bought the $80,000 car last year. The 59-year-old retired economist says he planned to wait another year or two to avoid having to finance the purchase, but as the dollar continued to slide, he decided to buy sooner. "I didn't want to keep waiting only to have the price rise," Mr. Grichar says. "I was getting antsy."


The 2007 BMW 3-Series sedan starts at $32,400, about 20% more than it cost five years ago.
He may well have made a smart move. "The reasonable expectation is that price increases for high-end European cars will continue to outpace the general yearly price increases for vehicles sold in the U.S.," says Paul Taylor, chief economist at the National Automobile Dealers Association.

Car companies generally say they don't raise prices based on exchange rates, even when the rates change significantly. But with the dollar down over a longer-than-usual term, prices have been moving upward. Since 2002, when the euro was roughly at parity with the dollar, the European currency has gained 40%, worth more than $1.40 now.

The BMW 3-Series sport sedan's base price has risen about 20% over the past five years, for example, before accounting for inflation. The car now costs $32,400, compared with $27,100 in 2002. The Mercedes-Benz ML350 rose 9.8% in the past two years, and the sticker price of the Jaguar S-Type midsize sedan, a United Kingdom-built model that has barely changed since its 1999 introduction, rose 9.3% in the past two years. (Jaguar is a unit of Ford Motor Co.) The price of the U.K.-built Bentley Continental GT has jumped about 13%, to nearly $170,000, compared with about $150,000 in 2004. (Bentley is a unit of Volkswagen.)

By contrast, Japanese car makers such as Honda Motor Corp. and Toyota Motor Corp. generally have such high profit margins that they have so far been able to eat into them instead of raising prices, says Robert Schnorbus, chief economist for J.D. Power & Associates, even though the dollar is also falling against the Japanese yen.

Prices for many domestic models have increased only slightly, remained flat or even fallen during the same period. Cadillac's CTS sport sedan, made by General Motors Corp., fell to $29,925 in 2007 from $30,190 in 2005. The price of the Mark LT truck, built by Ford's Lincoln unit, was roughly unchanged between 2006 and 2008 models, and the 2008 Lincoln Navigator was 3.2% less expensive than it was in 2006.

To be sure, changing currency values aren't the only factor driving up the price of some European cars. Some analysts attribute the price increases to the introduction of updated designs with more equipment and features. But others say that new features and redesigns may be used to mask currency-related price increases.

Auto makers can also use the introduction of a new model to raise prices. Jaguar hasn't said how much its 2009 XF model, which will replace the $55,835 S-Type sedan, will cost when it goes on sale next year. But it will certainly cost more than its predecessor does.

BMW spokesman Thomas Plucinsky says the company cushions itself from unfavorable exchange rates in part by acquiring an increasing number of components in the U.S. and building some of its vehicles here. The company tries to keep prices stable throughout a model year, Mr. Plucinsky says.

A Volkswagen spokesman says the euro-dollar exchange rate "certainly doesn't help" the car maker's business in the U.S., but the company is still "fully hedged for 2007 and more or less fully hedged for 2008."

He also says the company is studying the possibility of building vehicles in the U.S. "You have to look into it," he says.